Wednesday, 31 August 2005

Japanese industrial output fell 1.1 percent in July from June, more than markets had expected, but the government survey showed a pick-up was expected in the months ahead, suggesting Japan's economic recovery was gaining traction. Market forecasts had centred on a fall of 0.5 percent in July after a rise of 1.6 percent in June. Details showed the decline was led by sectors such as transportation equipment and general machinery, including machines to make flat panel displays.

However, the outlook remains optimistic.

But the report showed that manufacturers' output -- the core component of industrial production -- was expected to rise 2.3 percent in both August September, consistent with expectations that the economy was moving onto more solid ground...

Separate data on Wednesday also pointed to solid manufacturing activity in August. The NTC Research/Nomura/JMMA Purchasing Managers' Index (PMI) fell to 53.8 in August from 54.1 in July but the index remained above the 50 break-even line to mark an eighth straight month of expansion. The output component of the PMI hit its highest level in 13 months, which report compiler NTC Research said was "indicative of robust growth".

Despite yesterday's reported rise in the unemployment rate, Japan's Ministry of Health, Labor and Welfare today reported that wages rose 1.7 percent in July, the most in eight months and the fourth straight month of gains.

South Korean industrial output unexpectedly rose in July for the third consecutive month, helped by improving domestic demand, data showed on Tuesday, but high oil prices cast a shadow over the outlook.

Factory output rose a seasonally adjusted 1.3 percent in July from June, National Statistical Office data showed, beating the median forecast in a Reuters poll for a 0.7 percent fall. Output in July was 7.0 percent higher than a year earlier, outpacing expectations for a 5.1 percent increase...

Central bank data supported the view that domestic demand was strengthening by showing that Korean retail purchases on credit rose 2.8 percent in the second quarter after a fall of 2.6 percent in the first quarter.

High oil prices, though, is a threat to the South Korean economy.

Economists said high oil prices would inevitably hurt consumer sentiment, while government moves to cool the real estate market also risked dampening spending if previous measures were anything to go by...

Higher oil import costs could contribute to South Korea's current account swinging into deficit in August for the first time in four months, a central bank official said. Increased spending by travellers abroad would also contribute to the shortfall, the official said.

In July, the current account surplus more than halved to $1.37 billion from $3.25 billion surplus a year before, the central bank said on Tuesday.

U.S. consumer confidence unexpectedly strengthened in August as an improving job market outweighed rising gasoline prices, the Conference Board said on Tuesday. The private business research group said its consumer confidence index rose in August to 105.6 from a revised 103.6 in July. Analysts had predicted a decline to a 101.5 reading...

A separate report from the Commerce Department said new orders received by U.S. factories in July dropped the most since April 2004, though the decline was not as dramatic as expected. Demand for a wide array of long-lasting manufactured goods plunged...

New orders at U.S. factories fell 1.9 percent in July on a 4.9 percent fall in demand for durable goods, which are items expected to last at least three years. The fall was partially offset by a 1.7 percent increase in orders for non-durable goods. The durable goods figure was unchanged from an initial reading released last week...

... [T]he department said orders were not quite as strong as previously thought in June and rose just 0.9 percent. The department had previously said June orders were up 1.4 percent...

Separately, U.S. chain store sales fell in the final week of August, with back-to-school sales suffering from unusually warm weather, Redbook Research, an independent company, said in another report issued on Tuesday.

August sales to date were down 1 percent compared with the same span in July, while sales at major retailers rose 3.4 percent on a year-over-year basis for the week ended August 27.

The rise in consumer confidence was a surprise, but the Conference Board's survey was conducted before the recent spike in oil prices to nearly US$71 a barrel following Hurricane Katrina's rampage through the Gulf of Mexico.

William Polley noted that "these minutes paint quite a picture of how the Fed is concerned that the market needs to take note of the fact that upcoming policy moves are going to be dependent on incoming data." Nevertheless, he thinks that the "rate hikes are clearly not over".

The FOMC ultimately concludes that interest rates will likely have to trend higher, although, as always, they remain data dependent. As I suggested in my last post, I see the data as supportive of further rate hikes. Moreover, I tend to view Katrina as having a net inflationary impact, which adds another round of ammunition for the inflation hawks on the FOMC.

Tuesday, 30 August 2005

Japan's household spending fell for a third month in July, retail sales slumped and unemployment unexpectedly rose, suggesting a rebound in the world's second- largest economy is losing momentum.

Spending by households headed by a salaried worker dropped 3.5 percent from June, seasonally adjusted, the statistics bureau said today. Retail sales fell 2.2 percent in July, the trade ministry said. The jobless rate rose to 4.4 percent from 4.2 percent, as more people sought work.

Japan may not be the only major Asian economy facing a slowdown. Yesterday, there was a report that economists in China are getting concerned over a looming slowdown.

While China has spent two years battling to rein in its runaway economy, senior economists and government advisers now warn the economic powerhouse needs fiscal spending if it is to avoid a looming slowdown. Despite impressive headline numbers, there are big underlying problems which need to be confronted, they say. They echo calls to relax China's fiscal stance, dust off the policies of former premier Zhu Rongji and start issuing a greater number of treasury bonds to finance public works, helping to mitigate what they say is a dangerously slowing economy.

Cooling import growth, worryingly low inflation and shrinking industrial profits all suggest the expansion which began in earnest three years ago is under threat said He Fan, a researcher with the Chinese Academy of Social Sciences (CASS) and adviser to the government on economic matters.

But the AFP report also noted:

Yet first half gross domestic product data and July indicators clearly underlined there was little real statistical evidence of a slowdown. The debate about economic stimulus, it seems, remains just that.

Monday, 29 August 2005

Federal Reserve chairman Alan Greenspan's speeches at the symposium in Jackson Hole, Wyoming has attracted a number of comments in the mainstream media and the blogosphere, so I won't add to them except to highlight his remarks on the role of asset prices in the economy and in relation to monetary policy-making.

... The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes... [T]he growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk... The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher...

... To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely...

Debates on the relative merits of asset price targeting also will continue and possibly intensify in the years ahead. The configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth. But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon. However, I certainly do not rule out that future work could improve our understanding of asset price behavior, and with it, the conduct of monetary policy.

There was also good news though. Job figures in the US have been good, according to this Reuters report.

Help-wanted ads in 51 major newspapers across the country edged up in July, according the Conference Board, a private research group. The help-wanted index rose to 39 from 38 in June and was the highest since April. The report was consistent with the July payrolls report issued earlier this month showing 207,000 non-farm jobs were added...

Earlier, the Labor Department said the number of Americans making new claims for jobless benefits fell by 4,000 last week. Initial claims fell to 315,000 in the week ended Aug. 20 from an upwardly revised 319,000 and was far below the 342,000 logged for the same period a year earlier... The four-week moving average of new claims, which smoothes out weekly volatility, rose to 315,000 from 313,750.

Manufacturing also held steady according to the report.

The Chicago Fed's Midwest factory index rose 0.1 percent in July and was up 2.7 percent from a year ago... Regional steel and machinery output jumped in July while auto production fell 1.5 percent.

Growth momentum in Asia may have stabilized in the past two months as reflected in the July export data. The downtrend, however, will resume soon, in our view, as oil prices have risen further and more countries remove energy subsidies.

Also, the rising Fed funds rate is becoming a stronger headwind for Asia overtime. The Fed is raising interest rates in a strong economy enjoying a buoyant property market. However, most Asian economies are not as strong as the US's and could not handle the high Fed funds rate as well.

Recent data from Asia have been mixed. In Singapore, manufacturing output in July fell by 2.3 percent on a seasonally-adjusted month-on-month basis while in Taiwan, export orders received by Taiwan's manufacturers and traders in July slowed to an annual rise of 8.71 percent in July while its industrial production index fell by 1.13 percent from the corresponding figure of last year and its manufacturing production index fell by 1.34 percent. On the other hand, Hong Kong's GDP grew 6.8 percent in real terms in the second quarter and first quarter growth was revised up to 6.2 percent.

Meanwhile, Japan appears to be continuing its very gradual recovery from deflation, according to another Reuters report.

The core nationwide consumer price index (CPI), which excludes volatile fresh food prices, was down 0.2 percent from a year earlier, government data showed on Friday... On a seasonally adjusted basis, the core CPI was flat from June... Core CPI for the Tokyo area, compiled a month ahead of the nationwide index, fell 0.3 percent in August from a year earlier, matching economists' forecasts.

Thursday, 25 August 2005

Two government reports painted a mixed U.S. economic picture on Wednesday, as new orders for durable goods fell more than expected in July but sales of new homes unexpectedly rose to another record...

New single-family home sales rose 6.5 percent to a seasonally adjusted annual rate of 1.41 million units. The July sales pace was 27.7 percent higher than a year earlier. Economists had expected new home sales at a 1.333 million unit pace.

A separate report showed new orders for U.S. durable goods tumbled by a larger-than-expected 4.9 percent in July, the biggest drop in more than a year-and-a-half, as demand for most manufactured items fell. Orders excluding volatile transportation equipment also slipped much more than expected, declining 3.2 percent. Economists polled by Reuters were expecting a 1.2 percent drop in durable goods orders and a 0.6 slide in durables excluding transportation...

The housing report showed that while sales climbed, so did supply. The inventory of homes available for sale at the end of July stood at a record 460,000, up 1.8 percent from June and 15 percent higher than a year ago, the report showed. At the current sales pace, the supply of homes represented 4 months' worth in July.

The median price of a new home dropped for the third consecutive month, down 7.2 percent to $203,800 from $219,500 in June and off 4 percent from the price a year ago, the report said. The July sales price was the lowest since December 2003, when it hit $196,000...

In a separate report, the Mortgage Bankers Association said applications for U.S. home mortgages decreased last week, with purchasing activity falling for the first time in a month despite slightly lower interest rates.

Tim Duy, "unsettled" by these pieces of news as well as global capital flows into the US housing market, looked at some of the factors in the housing market and concluded that although there was a strong correlation between the lagged spread between mortgage rates and the fed funds rate and housing starts during the 1970s and early 80's, that relationship broke down in the late 1980's.

Well, as I look at his chart, it looks to me more that the relationship broke down in the mid-1990s, around the time the stock market acquired "irrational exuberance".

Wednesday, 24 August 2005

July existing home sales drop, supply upSales of existing U.S. homes dropped 2.6 percent in July as the pace of both condominium and single-family home purchases slowed across nearly the entire country, a trade group said on Tuesday.

Previously owned home sales fell to a seasonally adjusted 7.16 million unit annual rate last month from June's record, which was revised up to a 7.35 million unit pace, the National Association of Realtors said... Analysts had expected overall sales to decrease to a 7.25 million unit annual pace. "There seems to be some air coming out of some of these balloons," said David Lereah, the Realtors' chief economist.

Despite the decline, July's sales were the third highest on record, and some economists and real estate industry executives called the monthly dip good for a housing market that has been soaring for more than four years...

Importantly, July's data showed a pickup in supply, the Realtors' group said. The inventory of homes available for sale rose 2.6 percent to 2.751 million existing homes -- the highest level since May 1988 when inventory totaled 2.85 million. July's level equates to 4.6 months' supply at the current sales pace. Lereah noted, though, that supply was still lean by historical standards. This helped keep prices lofty, with the national median home price in July rising to $218,000, up 14.1 percent from a year ago, the report showed...

A separate report on Tuesday showed a sign of slowing consumer spending. U.S. chain store sales dropped 0.9 percent in the first three weeks of August compared with the same span in July, independent company Redbook Research said, as consumers postponed purchases and hurt back-to-school sales...

The outlook for the global economy for the second half of 2005 improved though, according to a quarterly survey by the International Chamber of Commerce and the German Ifo institute. AFP reports:

After five straight quarters of decline, the survey's confidence index stabilised in July... A global economic climate indicator came in at 97.5, the lowest level since February 2004 but higher than a long term average of 94 between 1990 and 2004...

A rebound was anticipated in North America in particular... Estimates for growth in Asia remained stable and continued to decline for Europe, though not for the 12-nation eurozone. Conditions were expected to deteriorate however in Sweden and Switzerland, and even more noticeably in Great Britain.

Forecasts for the semiconductor industry in the second half of the year support this optimistic view, as reported in the EE Times.

... [T]he worldwide IC-equipment book-to-bill ratio moved above parity and hit 1.03 in July, up from 0.99 in June, according to VLSI Research Inc... Bookings rose 3 percent to $4.3 million in July...

Worldwide fab manufacturing capacity utilization slightly improved in the second quarter of 2005, although overall silicon foundry rates remain anemic, according to the Semiconductor International Capacity Statistics (SICAS) group on Tuesday (August 23)...

Overall, the trends are positive, however. "Chip makers ran a lean ship in the first half of 2005, which left the industry well primed for the second half," according to VLSI Research. "Inventories are low, utilization is rising, and equipment orders are finally starting to pick up. The foundries and subcons are buying again."

Research firm Action Economics thinks the strong economic growth will translate to strong earnings growth, according to a BusinessWeek article:

Happy days aren't just here again. They may be hanging around awhile, predict economists from research outfit Action Economics. U.S. corporate profits posted powerful second-quarter gains, and solid third-quarter figures are expected as well. The profit boom in this cycle has been unusually large and has fueled a solid investment boom that's strong even relative to the previous expansion.

Continued strength in profits through yearend should keep the investment boom alive well into 2006. That bodes well for economic and financial-market performance in the coming months.

Yes, the economic outlook for the rest of 2005 looks sanguine. Financial markets need to focus increasingly on the outlook for 2006.

Tuesday, 23 August 2005

Japan's services industries expanded in June, as consumers spent more in shops and on surfing the Internet, suggesting the world's second-biggest economy may sustain a recovery from last year's recession.

The tertiary index, a gauge of demand for services that make up about 60 percent of the economy, increased 1 percent from a month earlier, seasonally adjusted, the trade ministry said today. The median estimate of 30 economists in a Bloomberg Survey was for a 0.9 percent increase...

From a year earlier, the tertiary index rose 2 percent. The retail section of the tertiary index increased 0.9 percent in June...

The tertiary index was unchanged in the second quarter from the first, while the all industry index increased 0.3 percent. In June, the all-industry index rose 1.3 percent from May and 1.7 percent from a year earlier.

Investor confidence in Germany, Europe's largest economy, increased to the highest in 17 months in August after the euro's decline spurred exports and German companies increased spending.

A measure of institutional and analyst expectations for economic growth rose to 50 from 37 in July, the ZEW Center for European Economic Research said today in Mannheim. Economists expected a gain to 39, the median of 40 estimates in a Bloomberg survey showed. The index's long-term average is 34.3...

Germany's domestic economy expanded for the first time in nine months in the second quarter, growing 0.3 percent from the previous three months, the Federal Statistics Office said today. Company spending on equipment and inventories led the gain.

Meanwhile, on the inflation front, both Hong Kong and Singapore saw some pick up in their inflation rates. Hong Kong's consumer price index rose 1.3 percent in July from the same month last year after a 1.2 percent increase in June, while Singapore's CPI rose 0.7 percent in July over the previous month on a seasonally-adjusted basis.

Monday, 22 August 2005

There's been a few comments intimating that, well, maybe an Inverted Yield Curve ain't so bad. I have to disagree in the strongest possible terms. And I have three decidely non-textbook reasons as to why: Cyclical, Liquidity, and Predictive factors.

Thankfully, we're not there yet. And at the current rate of curve flattening, it might take a while to get there.

If The Economist or Brad Setser had their ways though, maybe we won't. They argue -- here and here respectively -- that long rates should go up to redress the imbalance in the global economy.

Friday, 19 August 2005

The Conference Board's US leading index increased 0.1 percent to 138.2 in July, following a 1.2 percent increase in June. The index has increased 1.0 percent over the six months through July.

The Philadelphia Federal Reserve Business Outlook Survey showed that the region's manufacturing sector continued to expand in August. The diffusion index of current activity increased from 9.6 in July to 17.5 in August, its highest reading since April. The index for future activity increased from 15.3 in July to 33.4, its highest reading since December.

Less positively, initial claims for unemployment insurance last week was 316,000 according to Labor Department, an increase of 6,000 from the previous week's revised figure of 310,000. The 4-week moving average was 312,750, an increase of 2,750 from the previous week's revised average of 310,000.

Of course, things could get bad if the housing market deflates in a hurry, as this Reuters story warns.

The U.S. housing market may be starting to lose steam, experts say, with prices still rising but not at the skyrocketing rate to which sellers in hot markets have become accustomed. That means a shift in buyer behavior, some brokers said. This may be the first sign that either the booming U.S. housing market is a bubble ready to burst or it's a healthy economic cycle about to unwind fairly painlessly...

The Office for National Statistics said on Thursday that sales fell by 0.3 percent last month, only partly reversing June's huge 1.2 percent jump and taking the annual rate up to 1.8 percent. Analysts had expected a fall of 0.6 percent. Quarterly growth in sales, meanwhile, moved up to its highest level since November and the ONS said the underlying trend was up... Shop prices were on average 0.6 percent lower than a year ago, the same as in June, suggesting that retailers are not cutting prices that aggressively despite complaining about tough trading conditions since the start of the year.

Mortgage lending in the UK was weaker in July, according to figures from the British Bankers' Association.

The BBA said underlying mortgage lending rose by 3.7 billion pounds last month. That was the weakest increase since December 2001 but economists said the figures still pointed to a gradual slowdown in the housing market.

Meanwhile, Eurostat reported yesterday that industrial production rose 0.3 percent in the euro-zone in June after falling 0.4 percent in May and increasing 0.8 percent in April. Output in the EU25 also rose 0.3 percent in June after falling 0.3 percent in May and rising 1.0 percent in April.

In another report released yesterday by Eurostat, euro-zone annual inflation was shown to have been 2.2 percent in July, up from 2.1 percent in June. Monthly inflation for July, however, was -0.1 percent. EU25 annual inflation was 2.1 percent in July 2005, up from 2.0 percent in June. Monthly inflation for July was -0.1 percent. Energy prices "saved" Europe from worse deflation in July. Excluding energy, euro-zone monthly inflation was -0.4 percent.

It was a similar story at the producer prices level, at least in Germany.

Prices at factory gates rose by 0.5 percent month-on-month, the Federal Statistics Office said. On the year, prices rose by 4.6 percent, the same rate as in June and April and equalling the highest rate of annual producer price inflation since April 2001... A breakdown of the data showed that electricity costs had risen by 4.4 percent on the month and by 11.5 percent on the year in July. Prices of mineral oil products increased by 2.4 percent from June and by 16.9 percent from July 2004... [C]ore producer prices inflation had softened further. Excluding energy, prices rose by 1.4 percent compared with July 2004, slower than June's ex-energy annual gain of 2.0 percent, the Statistics Office said.

The inflation data from Europe is a reminder that even as we worry about oil and inflation, deflation continues to lurk just around the corner.

Fund managers continue to be increasingly upbeat about the global recovery -- not surprising given recent strong real economy news. The net balance of respondents expecting the global real economy to strengthen came in at +14%, compared to minus-34% just two months ago. The prospects for corporate profits have also picked up, although more managers still expect profits to deteriorate rather than improve.

According to the survey, energy is a favourite sector. Not surprising, with the high oil prices. Today's PPI data and yesterday's news show that much in the world economy now is being affected by oil.

[Y]ear over year S&P500 earnings for the quarter are up 12%, including the contributions of Energy sector... Without Energy, the SPX year-over-year quarterly earnings gains are a pathetic 4%. With Energy, they are robust -- but so, too, is inflation.

Oil prices did fall yesterday, but it remains to be seen whether this represents a peak in prices or just a temporary correction.

Wednesday, 17 August 2005

The Consumer Price Index, the most widely used gauge of inflation pressures, climbed 0.5 percent last month after an unchanged reading in June. It was the biggest monthly rise in consumer prices since a matching 0.5 percent jump in April. But so-called core inflation, which strips out volatile food and energy items, inched up just 0.1 percent for a third straight month -- less than the 0.2 percent climb economists had anticipated.

U.S. housing starts edged down 0.1 percent in July but exceeded Wall Street forecasts as groundbreaking for single-family homes marched higher, a Commerce Department report showed on Tuesday. July housing starts came in at a 2.042 million unit annual rate, down from June, which saw starts revised up to a 2.045 million unit pace from an originally reported 2.004 million unit rate...

Permits for future groundbreaking, an indicator of builder confidence, also exceeded economists' expectations, rising 1.6 percent to a 2.167 million unit pace -- a high not seen in more than 32 years. Economists had forecast permits to decline to a 2.105 million unit pace in July from a revised 2.132 million unit pace in June.

Industrial production increased 0.1 percent in July after a gain of 0.8 percent in June. Manufacturing output increased 0.1 percent in July; excluding motor vehicles and parts, manufacturing production rose 0.4 percent. The output at utilities rose 0.7 percent, and production at mines declined 1.3 percent.

At 119.4 percent of its 1997 average, industrial production in July was 3.0 percent above its year-earlier level. In July, capacity utilization for total industry declined 0.1 percentage point, to 79.7 percent, a rate 1.3 percentage points below its 1972-2004 average.

The weaker mining output, though, was attributed to hurricane-related shutdowns of oil and gas platforms in the Gulf of Mexico.

There was similarly mixed news from the UK. Inflation in July hit the highest level since 1997:

Soaring petrol prices pushed inflation above its target in July to the highest level since comparable records began in 1997, dousing expectations of further interest rate cuts. The Office for National Statistics said the consumer price index rose 0.1 percent on the month, taking the annual rate up to 2.3 percent from 2.0 percent in June.

House prices fell at their slowest pace in five months in July as the prospect of lower interest rates lifted confidence, a survey showed on Tuesday. The Royal Institution of Chartered Surveyors said its seasonally adjusted house prices balance for the three months to July rose to -36 from an upwardly revised -41 in the three months to June.

Chinese fixed-asset investment grew at a faster-than-expected annual pace in July but still fell from the previous month, reflecting the impact of government curbs and shrinking corporate profit margins. July's fixed-asset investment was 27.7 percent higher than a year earlier, compared with a median forecast of 25.8 percent from six economists polled by Reuters. Fixed-asset investment, which covers spending on things such as roads, power plants and apartment buildings, was up an annual 28.8 percent in June and 28.2 percent in May.

Of course, for China, a slowdown in fixed-asset investment is considered good news.

Tuesday, 16 August 2005

It looks like the US current account deficit can continue to grow as foreigners appear willing to fund a saving-short America.

Treasury International Capital (TIC) data for June released yesterday showed that net foreign purchases of long-term securities were US$71.2 billion, which represents a rise from US$55.8 billion in May and appears enough to cover the US current account deficit.

London is emerging as the global hub for the recycling of the world's oil windfall into financing of the US current account

Inflows into the eurozone (and the UK) from OPEC and Asian central banks are bidding up the price of eurozone debt and driving yields down to the point where private European savings is forced to seek yield in the US (and, so far this year, that has been a good bet).

The Fed doesn't need to raise rates much further to keep foreigners interested in US debt or keep the dollar up. In fact, higher interest rates are likely to only strengthen the dollar.

With a strong dollar and relatively low real interest rates, the US will keep importing like a mad man. What, me save? Popular convention wisdom these days seems to be relying on an end to housing price inflation to produce a renewed interest in personal savings. Yet the US personal savings rate has been plummeting since the mid-1980s. It is going to take the equivalent of moving heaven and earth to get Americans to start saving more than 1-2% of their income.

Global imbalances will only grow more and more acute over the rest of 2005.

In 2005Q1 the US current account deficit as a percentage of GDP was -6.4%. CA balance of -7% of GDP, here we come!

Stephen Roach also cites the low US saving rate in providing his usual pessimistic take on the outlook.

Over the years, I’ve learned to be wary of betting against the American consumer. But the history of energy shocks argues to the contrary. Moreover, today’s saving-short, asset-dependent, overly-indebted consumer is far more vulnerable than in the past...

No doubt, the hot housing market, as represented by record home sales and home price gains in recent months, goes a long way towards contributing to the indebted consumer.

However, the consumer is not the only one contributing to the US current account deficit. So is the US government. Reuters reports on the latest estimate of the budget deficit.

The U.S. budget deficit will be $331 billion this year...significantly lower than last year's record $412 billion... Congress' fiscal watchdog also forecast a $314 billion deficit for the fiscal year beginning on Oct. 1... While the non-partisan agency saw strong economic growth this year and next, the CBO said deficits would remain well over $300 billion annually through 2010, assuming war costs in Iraq and Afghanistan continue at their current pace.

Saturday, 13 August 2005

The U.S. trade deficit widened 6.1 percent in June to $58.8 billion, as exports held roughly flat while petroleum purchases drove total imports to a new high. The trade gap grew from May's $55.4 billion, the Commerce Department said. It exceeded analysts' expectations of a $57.3 billion deficit and was closing in on the record $60.1 billion gap of February 2005. Petroleum imports struck a record $19.9 billion as average oil prices in June swelled to $44.40 per barrel.

And oil may cause the trade deficit to worsen in the next few months.

U.S. crude oil closed up 1.6 percent at $66.86 per barrel, a record close, after earlier rising as high as $67.10... With oil prices having risen in July and into August, economists said it was likely the trade gap would widen more and possibly contribute negatively to GDP in the third quarter.

Reuters also reported:

In a sign that higher energy prices are affecting consumers, the University of Michigan's preliminary consumer sentiment index for August slipped to 92.7 from July's 96.5 reading.

Brad Setser warns that it is not just oil that is causing the trade deficit to deteriorate.

[Non-oil imports] were stuck at around $144 billion a month between January and May. It now seems likely that this slowdown reflected an inventory correction... Since that correction now seems behind us, the monthly non-oil US import bill looks set to rise throughout the remainder of the year. In June, non-oil imports ticked up by $1.65 billion or so, to around $146 billion. Watch that number for the rest of the year - I expect it will keep climbing...

Setser now forecasts the current account deficit for 2005 to be $820-830 billion, or about 6.7 percent of US GDP.

U.S. retail sales jumped 1.8 percent last month as buyer incentives led to the biggest gain in auto sales since just after the Sept. 11, 2001, attacks, a government report showed on Thursday... July's retail-sales jump followed a similarly healthy 1.7 percent rise in June, the Commerce Department said, but fell short of forecasts for a 2.2 percent rise. Excluding autos, sales rose a modest 0.3 percent, also below forecasts.

Auto sales shot up 6.7 percent last month... Gasoline station sales rose 2.4 percent, reflecting higher prices at the pump... Excluding both autos and gasoline, retail sales would have been unchanged in July. Sales at electronics, health and sporting goods stores moved higher. But the report showed a sharp 1.3 percent drop in furniture sales, after a 2.2 percent jump in June, and a 0.4 percent decline in building material sales.

... business inventories:

The [Commerce Department] said inventories at the nation's retailers, wholesalers and manufacturers held steady in June as sales rose 0.7 percent. At retailers, however, inventories dropped 0.4 percent as auto dealers cut their bloated stocks by 2.4 percent. The overall strong sales performance in June pushed the inventories-to-sales ratio -- a measure of the number of months it would take to deplete stocks at the current sales pace -- to a record low 1.29.

...and unemployment:

Separately, the Labor Department said the ranks of Americans filing initial claims for state unemployment benefits thinned by 6,000 last week to 308,000. The drop, which defied Wall Street expectations for a rise to 315,000, brought a four-week moving average of claims -- a closely watched barometer of the pace of layoffs -- down to 309,250, its lowest level since late February.

In Europe, GDP in the euro zone and EU25 both grew 0.3 percent in the second quarter from the previous quarter, according to Eurostat. In the first quarter, growth rates had been 0.5 percent in both zones. Among the major European economies, Germany's GDP was flat in the second quarter, compared to a 0.8-percent growth in the first quarter, while the UK economy grew 0.4 percent in the second quarter, the same as in the first quarter.

Meanwhile, in its update of economic forecasts for the euro zone, the European Commission forecasts a range 0.2 to 0.6 percent GDP growth for the third quarter, unchanged compared to the previous release, while its first forecast for growth in the fourth quarter is between 0.4 to 0.8 percent.

Japan's economy grew for the third straight quarter in the three months to June as a rebound in exports added to brisk capital spending and consumption, though the growth rate was slightly below expectations...due mainly to a drawdown in inventories.

Japan's current account surplus fell by an unexpectedly wide margin in June as soaring oil prices boosted the costs of imports and demand dwindled abroad for Japanese electronics, official figures showed Thursday...

For June, the current account surplus dropped 15.3 percent from a year earlier to 1.09 trillion yen (US$9.8 billion), the [Finance Ministry] said... The trade surplus for June plunged 57.4 percent year-on-year to 474.3 billion yen, with exports rising 1.7 percent to 4.58 trillion yen and imports expanding 21.2 percent to 4.10 trillion yen in the month, the ministry said.

China chalked up its second-biggest trade surplus on record in July... The $10.4 billion surplus in July took the cumulative total for the first seven months to $50 billion, already dwarfing the surplus for all of 2004 of $32 billion... July exports were up 28.7 percent from a year earlier, while imports rose 12.7 percent.

If China's trade surplus arises from an undervalued currency -- as many claim -- the effect of the latter does not appear to be showing up in its consumer prices.

China's consumer price index (CPI), a measure of inflation, rebounded slightly in July, rising 1.8 percent compared with the same period in 2004, official data showed. The July figure compares with a 1.6 percent year-on-year growth rate in June and 5.3 percent for July last year.

Brad Setser analyses China's trade performance and concludes that "China's economy looks even more unbalanced than the US economy, with far too much savings (and too little consumption) and far too much reliance on exports".

Thursday, 11 August 2005

Top economic forecasters expect U.S. economic growth to accelerate in the second half of 2005 but the consensus outlook for 2005 and 2006 was unchanged from July, according to a survey released on Wednesday.

But the newsletter said the recent bullish flow of economic data may well see these expectations pushed higher over the coming months.

The pace of the expansion has picked up steam into the second half of this year, with consensus forecasts from the August 3-4 Blue Chip survey showing an acceleration in growth to 3.9 percent in the third quarter from 3.4 percent in the previous quarter.

The Bank of England also seems to be forecasting a recovery in economic growth in the UK, according to this FT report.

The Bank of England’s quarterly inflation report on Wednesday signalled that the UK central bank was unlikely to embark on further interest rate cuts in the near future...

Analysts said the report was more hawkish than expected by forecasting a recovery in UK economic growth to rates above the economy’s long-running trend rate in the years 2006 and 2007 after a patch of weaker growth this year...

Based on current market expectations for interest rates, GDP growth would climb up to an annual rate of above 2 per cent by the end of this year before rising more strongly further ahead than predicted in the last inflation report in May.

Meanwhile, the IMF reports that Japan's near-term economic outlook has improved, according to Reuters.

The near-term outlook for Japan's economy is improving although an aging population and slow underlying economic growth pose medium-run dangers, the International Monetary Fund said.

In its report prepared July 29 and released Monday, the IMF also welcomed a plan to privatize Japan's postal system -- an effort defeated in parliament earlier on Monday, prompting Prime Minister Junichiro Koizumi to call a snap election.

The fund said Japan's economy has performed well so far this year, with recent indicators of retail sales, investment plans and employment growth heralding further expansion ahead. However, mild downward pressure on prices has persisted.

With the external economic environment turning somewhat less favorable and oil prices reaching record levels in nominal terms, East Asia is expected to experience a moderate slowdown this year. Available data for GDP and exports for the first half of this year already point to a slowdown, although with considerable variation

The ADB report may be getting a bit dated, though, particularly on the external economic environment. Singapore's Ministry of Trade and Industry issued a more upbeat outlook yesterday.

Moving forward, the outlook in the second half of the year has improved. Continued growth in the G-3 economies, a tentative recovery in the global electronics industry, limited impact from higher oil prices and stronger domestic forward looking indicators, together signal better prospects in the next six months...

Stronger domestic forward-looking indicators suggest that growth momentum would continue for the rest of this year. The latest business expectations survey reveals that sentiments in both the manufacturing and services have improved. In view of the improved outlook, the Ministry of Trade & Industry has narrowed the 2005 GDP growth forecast to 3.5-4.5 per cent.

Sustained growth in the second half of 2005 appears to be in the bag. It's time to look more closely at the outlook for 2006.

Wednesday, 10 August 2005

The Bank of Japan and the Japanese government have upgraded their assessment of the Japanese economy. From an AFP report:

"The economy is recovering slowly but steadily. But it's hard to say exactly when an economy will emerge from a lull. But I am almost certain that the economy is emerging from the soft patch," Bank of Japan governor Toshihiko Fukui told a news conference...

The economy is "recovering at a moderate pace, with the corporate sector as well as the household sector improving," the government said in a report for August, which was approved by Prime Minister Junichiro Koizumi's cabinet.

The latest data on machinery orders support this upgrade.

In another strong sign of recovery, the Cabinet Office said orders of machinery jumped 11.1 percent month-on-month in June on strong demand for chip manufacturing equipment and mobile phones, marking the first rise in three months. It was also the first time in seven months that core orders, which exclude volatile orders from electric utilities and for ships, posted double-digit growth, it said.

The Federal Reserve raised interest rates again yesterday by another 25 basis points. The target federal funds rate is now at 3.5 percent. In its statement, the FOMC said that "policy accommodation can be removed at a pace that is likely to be measured".

In other words, more of the same to come.

Quite a bit more, in fact, thinks the New Economist, pointing to the statement -- "Aggregate spending, despite high energy prices, appears to have strengthened" -- to suggest that "rates will have reached at least 4.0% by year-end, and should peak next year at around 4½%".

David Altig, on the other hand, considered the FOMC statement to be "ho-hum". He did, however, consider the productivity and costs report for the second quarter -- showing non-farm business productivity growth falling to 2.2 percent from 3.2 percent in the first quarter and unit labour costs growing at an annual rate of 1.3 percent, well below the first quarter's revised 3.6 percent rise -- to be "fairly positive news".

Reuters reports the news on the Fed rate hike and productivity growth, as well as other economic news.

Separately, the Commerce Department said inventories at U.S. wholesalers rose 0.7 percent in June, while sales increased 0.6 percent. The inventories-to-sales ratio stayed at a lean 1.19 months' worth... Investor's Business Daily and TechnoMetrica Market Intelligence said their economic optimism index rose to 50.9 in August from July's 48.6, suggesting consumers had grown optimistic after being in the below-50 pessimism camp... The International Council of Shopping Centers and UBS said sales at U.S. chain stores fell 0.8 percent last week, after a 0.9 percent gain in the previous week.

If the robust economy is not translating into substantially higher labour cost, much of the benefits must be stopping at the corporate level. According to another Reuters report, a research note from Merrill Lynch released yesterday reported that earnings growth for companies in the Standard & Poor's 500 index stands at 14 percent, double the rate of estimates before the reporting season started.

Home sales are expected to trend down from record levels during the second half of this year, but easily set annual records for both new- and existing-home sales, according to the NATIONAL ASSOCIATION OF REALTORS®.

Existing-home sales are forecast to increase 2.9 percent to 6.98 million for 2005, while new-home sales are seen to rise 4.8 percent to 1.26 million this year. Total housing starts—single-family and multifamily—should grow by 3.2 percent to 2.02 million units in 2005, the highest since 1978; single-family starts are projected to set a record of 1.67 million.

David Lereah, NAR's chief economist, says home sales should be fairly stable in the near term. "The housing market is probably close to a peak right now in terms of sales activity, but there is tremendous momentum," he says. "Sales are expected to coast at historically high levels into next year, but they will trend slightly downward."...

Annual house price inflation in England and Wales weakened to its lowest rate in almost a decade in the second quarter, government data showed on Monday. The Land Registry said that house prices rose just 5.43 percent in the April-June period compared with a year ago, a sharp slowdown from the 10.27 percent rise reported for Q1. The number of properties sold in the second quarter fell by an annual 27.7 percent to 216,890, but this was a marked improvement from Q1, when turnover plummeted 35 percent on the year to 159,116...

The Office for the Deputy Prime Minister (ODPM) said house price inflation slowed to an annual 5.0 percent in June from 6.0 percent the month before...

The nation's big mortgage lenders have already reported on July house price inflation, which is down to its lowest level in nearly a decade...

In his post, Ritholtz also stuck his neck out to say: "We expect a recession in the 2006-07 time frame."

Possibly. So far, I have not seen enough weakness to indicate a recession in the near term, but a lot can happen in two years.

Saturday, 6 August 2005

The US Labor Department report on non-farm employment showed that the economy added 207,000 in July while the unemployment rate was unchanged at 5.0 percent. In addition, revisions added 42,000 to the job growth figures for May and June, which were revised to 126,000 and 166,000 respectively.

Barry Ritholtz gives his take on the numbers here -- "It points to an ongoing improving economy, and continued Fed hikes" -- and gives economists' reactions here.

"This is a crystal clear indication that the labor markets are very healthy and it reinforces the notion that the economy is growing in a healthy, sustainable way," said Dana Johnson, chief economist at Comerica in Detroit...

"The Fed is going to keep chugging along," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston...

"As far as the Fed is concerned, payrolls growth is probably just about right -- not too hot and not too cold," Paul Ashworth of Capital Economics told clients in a research note.

It also highlighted the following details:

The factory sector, which shed 4,000 workers last month, was one of the only weak spots. However, the Labor Department noted that an 11,000-job drop in auto manufacturing reflected larger-than-normal temporary plant shutdowns for retooling...

Average hourly earnings shot up six cents, or 0.4 percent, in July -- the biggest rise in a year. However, earnings are up just 2.7 percent over the past 12 months, suggesting wages have yet to become a big inflationary concern...

Job growth was tepid at construction firms, which brought on just 7,000 new workers, but was strong on the service side of the economy.

Retailers added 50,000 workers, the biggest gain in that sector since April 2000. The strong retail hiring in part reflected growth at automobile dealers coping with a surge of shoppers enticed by special sales incentives.

Professional and business service firms, education and health service employers and the leisure and hospitality industry all exhibited robust hiring.

The Reuters report also carried other economic news for the day.

A Fed report issued later on Friday showed U.S. consumer credit rose an unexpectedly large $14.51 billion in June, the biggest jump in eight months, as both credit card use and closed-end lending surged...

In another spot of bright economic news, the independent Economic Cycle Research Institute said on Friday its leading index of the U.S. economy rose to a 12-week high last week. ECRI said the index suggested prospects for U.S. economic growth were improving gradually.

To top all these off, the OECD reported that its composite leading indicators show improved performance, with the index rising to 103.6 in June from 103.0 in May and the six-month rate of change rising in each of the Group of seven major economies except Italy.

The news from the US was mixed yesterday. In a sign of an improving US job market, the Labor Department reported that initial claims for unemployment benefits fell by 1,000 to 312,000 last week while the four-week moving average fell to 316,750 from 319,000 the previous week. On the other hand, July sales at US retailers were disappointing, with same-store sales rising only 3.7 percent from a year earlier -- a drop from 5.4 percent in June -- according to Retail Metrics.

Thursday, 4 August 2005

In the US, the ISM index of business activity in the non-manufacturing sector read 60.5 in July, a slight drop from 62.2 in June. The ISM reported that price increases are a primary concern though, with the price index rising 10.5 points over the previous month.

Another concern might be developments in the housing market. The National Association of Realtors said its housing affordability index dropped to 120.8 in the second quarter from 133.2 in the first quarter.

In Europe, the NTC Research Service Sector Business Activity Index for the eurozone rose to 53.5 in July, the same level as May, reversing the fall to 53.1 in June, while that for the UK rose to 56.3 in July from 55.8 in June.

Yesterday, the EU statistics office Eurostat reported that the volume of retail trade grew 0.9 percent in June in the eurozone and by 1.7 percent in the EU25 compared to June last year. Compared to May 200 5, retail sales rose 0.4 percent in the euro zone and by 0.5 percent in the EU25.

According to The Financial Times, Michael Deppler, director of the International Monetary Fund's European department, had this to say of the eurozone economy: "The notion of the first half of this year having been the low point is bearing out and things should be improving."

That did not stop the IMF from cutting its growth forecast for the eurozone to 1.3 percent this year, less than the 1.6 per cent predicted in April, while 2006 growth forecast was cut to 1.9 percent from 2.3 per cent.

Wednesday, 3 August 2005

Declining commodity prices and property sales have decreased corporate cash flows. In response, corporates are putting the brakes on their on-going investment projects. This typically represents the first stage of slowdown following an investment-led boom.

Decelerating energy consumption and rising inventories are the visible signs of the slowdown. The dramatic decline in China's imports of petroleum reflects both slowing energy demand in general and the growing availability of coal...

Following the central government's introduction of anti-speculation policies in the spring, speculative demand in the property market has dried up...

He sees a silver lining though.

As the economy slows, adjustments in the property market and vanishing bottlenecks should redistribute more income to the household sector through declining prices. This should benefit the low-income group especially. This dynamic suggests that the coming economic slowdown should benefit social stability, in our view.

A clear slowdown in the Chinese economy would also help cool speculative pressure on the renminbi to revalue further. Ben Carliner has more on the latter at Cynic's Delight.

Yesterday, the US Commerce Department reported that factory orders rose 1 percent in June on strong demand for computers and electronics. Orders for durable goods were revised up to 2.0 percent from the previously-reported 1.4 percent.

In another report, the Commerce Department announced that US consumer spending rose 0.8 percent in June. Purchases of motor vehicles and parts boosted overall spending. Personal income and disposable personal income increased 0.5 percent. In May, consumer spending had been down less than 0.1 percent, while personal income and disposal personal income had been up 0.2 percent. The price index based on personal consumption expenditure was little changed in June from May.

Reuters has a story covering these reports as well as two other reports on US retail sales showing "buoyant consumer spending at the end of July".

The bad news though is that the US saving rate dropped to zero. No wonder Americans are drowning in debt. The increased value of real-estate holdings has helped American consumers spend, but as Mark Gilbert says in his article "Home Bubbles Don't Deflate, They Burst": "God help the U.S. economy if consumers can't rely on ever-higher property prices to boost their sense of economic well-being."

Tuesday, 2 August 2005

The global manufacturing PMI rose to 53.4 in July, a nine-month high, from June's 52.3. The output index rose sharply to a 10-month high of 56.2 from 53.6 in June while the new orders index also hit a 10-month high of 55.7 from June's 54.1.

The Institute for Supply Management index for the US surged to 56.6 from 53.8 in June. In the euro zone, the NTC Purchasing Managers' Index climbed to 50.8 from 49.9 in June. Japan's PMI rose to 54.1 from 54.0 in June. China's PMI rose to 51.5 in July from 51.0 in June. Not all countries saw improvement though. The UK PMI fell to 49.2 from 49.6 in June and Australia's fell to 48.7 from 55.2 in June.

Manufacturing got a further boost yesterday with the Semiconductor Industry Association announcing that it expected chip sales to accelerate in the second half of 2005 after a 6.5 percent rise in the first six months of the year over the same period in 2004.

All this is good news for the manufacturing- and export-dependent Asian economies. And there have been quite a number of other pieces of good news from Asia lately.

One significant piece was from Japan. Average land prices in Tokyo were reported to be up this year -- the first rise in 13 years. Nationwide, land prices fell, but by the slowest rate in 13 years.

In addition, wages were up in Japan in June, with total cash earnings up 1.1 percent over the previous year, while full-time employment rose 1.0 percent.

South Korean exports rose 11.4 percent in the year through July, the fastest pace in four months, while consumer inflation slowed to 2.5 percent year-on-year, the lowest since August 2002.

Meanwhile, Taiwanese and Singaporean businesses are optimistic about the outlook. 24.7 percent of Taiwanese businesses surveyed expected an upturn in the second half of this year while 18.4 percent were bearish in their expectations. In Singapore, businesses in the manufacturing and services sectors are reported to be optimistic about the business outlook for the second half of 2005.

The S&P 500's gain is the best July gain since 1997, which incidentally was also a post-election year. Not that any of this necessarily means anything with regards to the likely future direction of the market.

I look at last month's performance by the Singapore stock market from both the economic as well as the long-term historical perspective in "Stocks fly in July".